Bond yields soar as Germany digs in heels over Greek bailout

Demands by Germans that bondholders must share pain of new rescue package spark a war of words with ECB

Vegetable market and port workers light flares in front of the Greek parliament during a protest in Athens' Constitution
(Syntagma) square yesterday. The Greek government defended its new austerity package in parliament, saying it was the
only way to stave off bankruptcy, and vowed to pass it into law before July. Photo: REUTERS/YANNIS BEHRAKIS

A WAR of words between the ECB and Germany intensified last night, sending the yield on Greek and Irish government bonds sky high.

Germany is insisting that bondholders should have to share the cost of a second Greek rescue, defying the views of ECB president Jean-Claude Trichet who is opposed to a policy he believes would damage financial confidence inside the eurozone.

The yield -- or cost of borrowing -- on Ireland's 10-year bonds was back to over 11pc last night, losing all of the gains seen since the market welcomed the bank stress test at the end of March.

Restructuring

The yield on the Greek bonds due to be paid back in two years hit 25pc. The yield on Irish two-year bonds was 11.33pc. Yields should be lower for shorter dated bonds but investors now see a real risk that bonds due to be paid soon are most likely to be caught up in a restructuring.

"We have to insist on the participation of the private sector," Germany's finance minister Wolfgang Schaeuble told policy makers in Berlin yesterday.

He wants bondholders to extend the repayment date on Greek debt by seven years. Mr Schaeuble is pressing ahead with his policy despite ratings agencies saying it's likely to be classes as a default by Greece.

He made the comments just one day after Mr Trichet absolutely rejected such a plan.

Mr Trichet said he would back a plan that sees bond investors voluntarily agree to buy new Greek bonds when the ones they already hold mature, but nothing more drastic.

The ECB is the most important lender to Greece, as a bondholder and as the chief supplier of liquidity to Greek banks.

Without German backing the European bailout funds would struggle to raise cash in the markets. The heads of government from the eurozone are meeting on June 23 and 24, and it was expected they would be in a position to sign off on a new Greek plan.

A working group has been set up to examine the issue. Its role now is to come up with a plan that matches the German demand for bondholder pain with the ECB opposition to a default.

Yesterday, ECB officials came out in force in an effort to shut down the German policy.

ECB vice president Vitor Constancio said it's up to Germany to break the impasse.

"It wasn't the ECB that asked for private-sector involvement," he said.

ECB official Juergen Stark said governments should end the "fruitless discussion" about restructuring. (additional reporting by Bloomberg)